Economic Uncertainty Looms as Inflation Concerns Persist
As the US economy enters 2025, inflation remains a top concern, with many experts predicting that prices will continue to rise. According to Deutsche Bank’s chief economist, Matthew Luzzetti, inflation is expected to decelerate gradually, but will still remain uncomfortably high for the Federal Reserve.
Stubbornly High Prices
So far this year, inflation has moderated, but core prices, which exclude volatile food and energy costs, remain above the Federal Reserve’s 2% target. The core Personal Consumption Expenditures (PCE) index and the core Consumer Price Index (CPI) rose 2.8% and 3.3%, respectively, over the prior-year period.
Services Drive Inflation
Luzzetti attributes the persistent inflation to the services sector, particularly healthcare, insurance, and airfares. Shelter inflation also remains high, although it is expected to come down over the next year.
Fed’s Projections
The Federal Reserve’s Summary of Economic Projections (SEP) predicts that core inflation will hit 2.5% next year, higher than its previous projection of 2.2%. This aligns with Wall Street’s current projections, with the majority of economists surveyed by Bloomberg expecting core PCE to moderate to 2.5% in 2025.
Risks of Higher Inflation
Nancy Vanden Houten, lead US economist at Oxford Economics, warns that the risks are tilted towards higher inflation, citing the potential implementation of policies under the Trump administration, such as high tariffs on imported goods, tax cuts for corporations, and curbs on immigration.
Tariffs and Interest Rates
President-elect Donald Trump’s proposed policies are considered potentially inflationary, which could further complicate the Federal Reserve’s path forward for interest rates. Federal Reserve Chair Jerome Powell has cautioned that the extent of policy adjustments remains uncertain, but Nobel Prize-winning economist Joseph Stiglitz believes that tariffs will lead to higher inflation and potentially even a global slowdown.
Economic Outlook
Despite the uncertainty, the US economy has shown resilience, with retail sales topping estimates, GDP remaining strong, and the unemployment rate hovering around 4%. However, economists are divided on the impact of Trump’s policies, with some predicting a soft landing and others warning of a potential “tit-for-tat” trade war.
Investor Sentiment
Investors are starting to take notice of the risk, with expectations of a “no landing” scenario, in which the economy continues to grow but inflation pressures persist, hitting an eight-month high in the latest Global Fund Manager Survey from Bank of America.
Tariff Uncertainty
It remains unclear which policies will be a priority once Trump takes office, but economists are baking in higher inflation over time. Deutsche Bank’s Luzzetti projects a 20% cumulative rise in tariffs on China, in addition to more targeted levies on Europe, which will lead to higher inflation over time.
Fed’s Response
The Federal Reserve is expected to respond to higher inflation by keeping interest rates steady, rather than cutting them further. Luzzetti believes that the economy will remain resilient, but the Fed will not be comfortable with inflation above 2.5% and will therefore not keep cutting rates.
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